Okun's law integrated: France

We have just estimated a version of Okun’s law for the USA. We have applied a LSQ technique to the integral version of Okun’s law:

u(t) = u(t0) + bln[G/G0] + a(t-t0) (1)

where u(t) is the rate of unemployment at time t, G is the level of real GDP per capita, a and b are empirical coefficients.

For France, we have a model estimated by a simple eye-fit. Here we re-estimate the model  with a structural break somewhere between 1980 and 1990. The best-fit (dynamic) model minimizing the RMS error of the cumulative model (1) is as follows:

du = -0.155dlnG + 0.805, t<1987

du = -0.508dlnG + 0.710, t>1986 (2)

This model suggests a big shift in the slope and a smaller change in the intercept around 1986. Figure 1 depicts the observed and predicted curves. The agreement is very good, with the highest difference since 1995 which might be associated with the change in monetary policy.

The cumulative form of the dynamic Okun’s law is characterized by standard error of 0.60% for the period between 1958 and 2010. The average rate of unemployment for the same period is 3.3% with an average annual increment of 0.59%. Figure 2 displays the cumulative model error.

Figure 1. The observed and predicted rate of unemployment in the France between 1962 and 2010.

Figure 2. The residual error or the cumulative model.